Rethink Soil Value | Why Not Reflect the True Cost of Soil Erosion in the Economic Value of Land?

If your soil became worth 10 times what it is today, would you modify your management systems to better preserve it? When a parcel of Iowa land recently blew up the market at $20,000/acre, was that a reflection of the productivity of its soil? Or simply two aggressive buyers?

Today’s land prices are inefficient, claims Clay Mitchell, Buckingham, IA, grower and Harvard biomedical engineer and Saltonstall Fellow at Cornell University. “They’re determined by historical productivity and old soil surveys, but not by how much topsoil remains for future income potential,” he says.

The trouble with our vanishing soils is the lag between soil loss from erosion and productivity declines, says Howard G. Buffett, Decatur, IL, farmer and philanthropist. As part of his self-described Brown Revolution to raise awareness about this issue, he and 28-year-old son Howard W. Buffett hope to promote a new soil-valuation system that reflects the true costs of erosion.

They’re not alone in believing that if growers and investors had a more accurate index of soil quality, measured in real time, they’d have a heightened stake in preserving soil quality and quantity.

Conservationists, economists and curious minds are trying to devise an economic valuation system for the magic yet diminishing resource that makes American agriculture the best in the world.

“Because the rate of yield decline is higher as topsoil thins, the cost of erosion is always much higher for the next generation than it was for us,”Mitchell says. Because there has been no lemon-detection in the marketplace, farmland owners haven’t had an incentive to require soil-saving practices, and operators therefore haven’t been fully motivated, financially, to reduce soil loss.

“American farmland has lost half of its topsoil and organic matter, and tremendous productive potential, as farmland buyers haven’t taken the current soil inventory of prospective purchases, which depends hugely on management history,” Mitchell says.

“Corn Suitability Ratings (CSR) and Productivity Indexes in many Corn-Belt states are old, static assessments of your soil’s value,” Mitchell says. “Furthermore, the maps are interpolations of an inadequate number of data points.

“For example some of the best soil in Iowa lies in the loess hills,” he says. “I’ve seen land with a CSR of 43 that produces 200-bu. corn. When that rating system was devised years ago, it over-penalized slopes, reflecting the difficulty of plowing uphill. These rating systems don’t reflect how soils change all the time as a direct reflection of how they are managed.

“A more current dynamic of the CSR that realizes the value of this farm can change by the minute, creates greater economic incentives for farmers to steward their topsoil,” Mitchell says.

“As things are now, our soil resource is like a mine: as long as the bucket comes up full from the mine, we don’t worry about depleting it. But one day that bucket will come up empty, and we need a gauge to reflect what we’re consuming.”

Howard G. Buffett likens soil loss to noticing one day that your tires are bald, after overlooking their gradual decline. “But you can buy new tires, you can’t create more topsoil.”

If it took us 500 years to produce one new tire, “we would treat them differently,” says Howard W. Buffett, the youngest generation of Buffetts to devote energy to agriculture policy. With a solid track record in public policy and experience on his Nebraska farm, he hopes to build public awareness on the fragility of topsoil.

“These folks are saying if topsoil has a separate value, people will be more careful with it,” says Steve Taff, University of Minnesota ag economist and manager of the university’s land economics website, www.landeconomics.edu.

“For several resources – like oil, water, minerals, gravel and even wind – society created separate legal documents for surface and subsurface rights, and they are transacted separately. Will topsoil join this category as it grows more valuable?”

Mitchell and the Buffetts aren’t talking about regulation, but about enlightened self-interest.

“I want growers to have a deeper gut feel that farmland is a fragile asset,” Mitchell says. “The right soil-value index would create incentives to make soil like an oil well that never runs dry. And real-time technologic soil measurements can reflect the inherent differences from one field to the next.”

Investors will benefit from better soil metrics, too, Mitchell says. If institutional investors can accurately assess one parcel’s soil resource to another, they can arbitrage the market by correlating land’s value more directly to its productivity.

It’s become clear to him that conservation and stewardship must align with economics and “enlightened self interest,” to financially reward both farmers and investors commensurately.

“This mechanism may also prove useful for soil-wise growers who need a capital partner to access the best topsoil. The right incentives align many parties’ interests,” Mitchell says.

Howard G. Buffett worries that, “If the marketplace cannot remedy erosion, we will be regulated. If we allow ourselves to be regulated on this issue it will be a huge mistake, for farmers and for food security. Regulations don’t allow famers to do what works best for them.

“As science and better technology determine what’s happening on farms, I see a day where each farm has a nutrient-management plan, as we have now in the Chesapeake Bay watershed,” the senior Buffett says.

“With soil fully valued, producers will be better able to increase food productivity in the next 40 years as much as they have over the past 500. We have an opportunity in this country not just to preserve what we have, but also to increase our productivity if we farm a little differently. I don’t have to sell a single tractor to do that. Cover crops, better nutrient management, no-till or strip-till; these are all tools available right now,” he adds.

The Midwest “is cursed with really good soil,” says Taff. “It does not reveal lost production

from daily soil loss for decades. That’s not very much of a motivator to reduce soil loss. Yet those losses stack up.”

All you need to build awareness “is to get the ball rolling,” Mitchell says, “up and over the hill. It will roll the rest of the way as the whole industry realigns itself. You just need better information that differentiates between land that has and hasn’t been destroyed. Farmers would market their ability to conserve land to landlords. You would see third-party measurements to standardize this.”

Topsoil is like water in some ways, Buffett says, “and it will be the first farming resource to test our conservation IQ. “We operate three center pivots on our farm near Tekamah, NE, at no cost beyond the electricity for the pump. When it runs dry, we’ll look back and wonder why we didn’t incorporate its true cost because we can’t replace it.”

Could Land Mimic Timber Asset Model?

By Clay Mitchell

Institutional investors view farmland today as timber was 20 years ago when it was developing as an asset class. Investor ownership in timber grew from less than $1 billion to over $50 billion due to third-party certification of Best Management Practices (BMP) by forest managers.

The timber market, only about one-tenth the size of the farmland market, was made investable by squeezing inefficiencies out of the system. Today, institutional land investors seek the same level of soil-quality measurements to help in their valuations that timberland buyers developed decades ago.
To grasp the long-term viability of an asset, timber investors needed evidence of foresters using BMPs that were appropriate for the local climate, soil, topography and timber type. Third-party certifications from four organizations (American Tree Farm System, Forest Stewardship Council, Program for the Endorsement of Forest Certification and Sustainable Forestry Initiative) became critical for forest managers.

Among forest operators, poor stewardship became viewed as a violation of professional ethics. Throughout the value chain, certifications became an opportunity to show skill and professionalism, not a set of burdensome rules.

Despite the much longer production horizons in timber compared to farmland, the timber industry brought transparency to sustainability issues that might not have cash impacts for generations.

Even though investor ownership in timber is still far below 50%, the improvements and new technologies produced better appraisals and productivity measurements that re-priced an entire asset class.

I expect similar benchmarking in the land market, as institutional investors seek better data on their potential asset. Technologies today can give us critical soil-quality benchmarks far beyond what we have now. Investor demand for transparency and improved productivity measurement, along with technologies that allow accurate inventorying of soil and high land prices will have profound effects on the economics of farming and eliminate both inefficiencies.

Losing ground

“We have the data to put an economic value on topsoil, but what kind of bonus do you assign to an irreplaceable resource? ” asksRichard Cruse, Iowa State University (ISU) agronomist and director of the Iowa Water Center. He leads a research team using the latest technologies to more realistically track the state’s soil erosion.

Data from the resulting Iowa Daily Erosion project found that roughly 25% of Iowa’s row-crop ground erodes at more than twice NRCS’ “tolerable” rate of 5 tons/acre/year, Cruse says.

“It seems that we can lose 5 tons/acre/year and still maintain productivity,” Cruse says.

“The best science I can find now is that soil renews itself at just 0.5 ton/year worldwide.”

Our current farm system “is destined to fail because we depend on soil, fossil fuel and phosphorus, which we don’t recycle.

“Topsoil is the basis of our economy, the basis for international trade and the basis for food production worldwide,” Cruse says.

“And we expect taxpayers to pay us to do the right thing (conserve soil). If you buy a used car, it’s with the expectation that you will pay for future repairs. But if you buy farmland, it’s often with the expectation that the government will pay you to preserve your soil,” he says.

Food for thought

The United States is losing soil 10 times faster -- and China and India are losing soil 30 to 40 times faster -- than the natural replenishment rate.

As a result of erosion over the past 40 years, 30% of the world's arable land has become unproductive.

Farmland is shrinking by almost 37,000 square miles/year due to soil erosion.